The response of the economy to fiscal policy

3. The response of the economy to fiscal policy a. Use an IS-LM diagram to show the effects on output of a decrease in government spending. Can you tell what hap- pens to investment? Why? Now consider the following IS-LM model: C = Co + C(Y - T) I = bo + bY - bzi Z = C+I+G i = i b. Solve for equilibrium output when the interest rate is i. Assume c + bj